Telstra deal costing taxpayers millions will be scrapped

A DEAL that sees Telstra receive millions of dollars a year from the taxpayer to ensure all Australians have access to a telephone line should be largely scrapped in the next few years.

That's the recommendation delivered today by the government's Productivity Commission, which called the Universal Service Obligation (USO) deal "anachronistic and costly" and said "it should be wound up by 2020" to coincide with the completion of the National Broadband Network.

The suggestions made in the final report are hardly surprising given that a draft report published in December called on the government to abandon parts of the current agreement, calling it "anachronistic" and "obsolete".

The 20-year contract, which has a net value of $3 billion, is set to run until 2032, and means the country's major telco receives millions in funding to ensure those who aren't catered to by the market have access to a standard telephone service.

As part of the agreement - which was first introduced in the 1990s - Telstra also provides payphones to all Australian towns.

About half the funding comes from taxpayers while an industry levy is used to subsidise the rest, meaning the likes of TPG, Optus and Vodafone subsidise Telstra to deliver phone services to Australians in the bush.

The commission's report said the impending completion of the NBN and improving mobile network coverage meant "more than 99 per cent" of premises would have access to reliable and affordable voice services effectively making the USO agreement unnecessary.

"The commission's assessment is that the service level provided by NBN, combined with existing mobile networks will be more than adequate to meet a baseline level of broadband and voice service availability for the vast majority of premises across Australia - particularly for all premises in the NBN fixed-line and fixed wireless footprints, and those in the satellite footprint with adequate mobile coverage," it said.

The report called the current agreement a "blunt instrument with a one-size-fits-all approach to universal service provision" and called on the government to renegotiate and scrap much of the deal with Telstra.

"While Telstra may have acted with goodwill in fulfilling its contractual obligations, these arrangements no longer serve the best interests of the Australian community," it said.

The deal has long been a source on contention for the telco industry. Complaints from competitors such as Vodafone typically centre on the fact that there has been very little oversight as to exactly how Telstra spends the money it receives each year.

Vodafone led the charge against the current USO deal, calling it "opaque, inefficient, inflexible and (an) outdated model which delivers poor outcomes for consumers at the cost of substantial distortions to competition," in its report to the Commission's inquiry.

Senior lecturer in political science at the school of government and policy at the University of Canberra, Michael De Percy, told news.com.au last year that it was clear the agreement was "leftover from the past".

"It's fairly obvious that it needs to be more transparent," he said. "Because it's opaque and Telstra wants to keep it, it's obvious that it's to their advantage."

Telstra has previously said it remains supportive of changes being made to the USO but points out that it will take some time to properly consider all the implications for remote Australians.

"We need to make sure that we fully understand the impacts this could have on customers before taking any action that could see remote customers left without a reliable service," the company said.

As the Productivity Commission's report points out, transitioning away from the current USO could take "a few years" but the "transition process needs to start immediately," it said.

"The fundamental roadblock posed by the opaque contract with Telstra, and the surrounding legislative architecture, should be addressed promptly and systematically."

But it remains to be seen how aggressively the government will pursue the recommended changes.

"Implementing the recommendations put forward in this inquiry will clearly require a major renegotiation of the contract," the Productivity Commission noted.